Junk Bonds at Record $54B in Quarter

Junk bond issuance reached a record $53.8 billion in the second quarter, buoyed by strong demand for capital and investors' quest for yield, according to Securities Data Co.

With issues at nearly double the $28.6 billion logged in last year's second quarter, the high-yield market is well on its way to another record year. During the first half, both registered and unregistered junk bonds totaled $99.9 billion. There was $124 billion of issuance in all of last year.

But investor concerns over possible fallout from the Asian economic crisis and choppy equity markets at home have contributed to some tough times for issuers. Also, there was a seismic power shift from junk bond issuers to buyers in the second half of the quarter, most market observers agree.

Even so, the low-interest-rate environment makes high-yield bonds look appealing to many investors. Though the pace of new junk bonds has slackened over the last month, plenty of issuers are still lining up to do deals.

"The pipeline is good-it just depends on if the investors are there," said Art Penn, managing director and head of global fixed-income capital markets at BT Alex. Brown Inc., the securities subsidiary of Bankers Trust Corp.

Weekly cash inflows into mutual funds investing in high-yield bonds were off from a record first quarter. They dropped to an average of $321.5 million a week in the second quarter, from $589.2 million a week in the first quarter, according to AMG Data Services Inc.

"The good news is that the market has cooled somewhat from a very feverish pitch," Mr. Fridson said. "Bankers love writing a lot of tickets, but there's always the worry that maybe quality is beginning to slip when there is that much pressure on the market."

The lowest-rated companies, those rated B-minus or lower on a senior equivalent basis and those that are unrated, declined as a percentage of the overall junk bond market, Mr. Fridson said.

In the second quarter they declined to 27.2% of new high-yield issuance, from 37.7% in the first quarter, Mr. Fridson said.

By comparison, the market share for lower-rated companies hovered around 20% in the mid-1990s. "The highly leveraged part of the market is at a higher point today than at any time during the 1980s," Mr. Fridson said.

Junk bond investors' flight to quality toward the end of the quarter has led to the widest point spreads over comparable Treasuries in two years, making it more costly for issuers to tap the junk market for capital.

"It's both a function of the improvement of the underlying treasury market coupled with more leverage on behalf of investors in terms of pricing new issues," said Bill Finnegan, Chase Securities Inc.'s managing director and head of global leveraged finance.

"The market is more balanced now. The beginning of the year was definitely an issuers market," Mr. Finnegan said.

Indeed, investors have become so picky that some lower-rated companies- particularly in telecommunications-have had to think twice about whether to proceed with issues at all.

"The junk bond market has sort of split into two markets-telecom and everything else," Mr. Fridson said.

"A lot of investors are very wary about the smaller deals because they don't know how much liquidity there will be in the secondary market for them," Mr. Fridson said. "Also, they are worried that all of these telecom deals that were called off in the last quarter will reemerge, and everything that is traded today will be downgraded."

The energy sector was the worst performing in the junk bond market last quarter, with the price of issues driven down by low energy and oil prices, market observers say.

"I think any improvement in the energy sector will be a function of some resolution of the Asian economic crisis and some sort of management of supply by OPEC countries," Chase's Mr. Finnegan said.

Meanwhile, banks underwrote 22.3% of junk bonds in the last quarter, roughly equivalent to their market share in the first quarter, but down sharply from 34.2% in the second quarter of last year.

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